Q4 2019 Earnings Call
Please standby.
Good day, everyone and welcome to the Synaptics fourth quarter fiscal year 2019 conference call.
I remind you that today's call is being recorded and now it's my pleasure to turn the conference over to Jason Sorry, Jason.
Good afternoon, and thank you for joining us today on Synaptics fourth quarter fiscal 2019 conference call. My name is Jason sorry.
The head of Investor Relations at Synaptics with me on today's call are currently our interim CFO and Chief Accounting Officer, and so we'll <unk> senior Vice President and General manager of our I O T Division corporate marketing and Investor Relations.
This call is also being broadcast live over the web and can be accessed from our Investor Relations section of the website Synaptics Dot com.
In addition to a supplemental slide presentation. We have also posted a copy of these prepared remarks on our Investor Relations website.
Supplementary slides have also been furnished as an exhibit to our current report on form 8-K filed with the FCC earlier today and add additional color on our financial results.
In addition to the company's GAAP results management will also provide supplementary results on a non-GAAP basis, which excludes share based compensation acquisition related costs and certain other non cash or recurring or non recurring items. Please refer to the press release issued after market closed today for a detailed reconciliation of GAAP and non-GAAP results.
Additionally, we would like to remind you that during the course of this conference call Synaptics will make forward looking statements, we're looking Siemens give or current expectations and projections relating to our financial condition results of operations plans objectives future performance and business, Although synaptics believes our estimates and assumptions to be reasonable they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate synaptics cautions that actual results may differ materially from any future performance suggested in the company's forward looking statements. We refer you to the company's current and periodic reports filed with the FCC, including the Synaptics Form 10-K for the fiscal year ended June Thirtyth 2018 for important risk factors that could cause actual results to differ materially from those contained in any forward looking statements.
No haptics expressly disclaims any obligation to update this forward looking information I will now turn the call over to so we'll also raised the wheel.
Thanks, Jason I'd like to welcome everyone.
This call.
Happy to be speaking to you today on behalf.
Working on executive leadership.
As I'm sure you saw earlier this week.
The appointment of Michael posting.
New President and CEO .
And he is expected to start August 19.
The joint Synoptic sport on the data supporting.
Yeah happy to welcome Michael as he brings with him a wealth of experience in semiconductors, especially in markets that you're focused on.
And then there's a strong track record in delivering results.
Believed that Michael will be a great cultural fit for the company and look forward to his leadership in driving the transformation and the next wave of growth for the company.
Now I will first provide an update on our business and our corporate transformation.
And then Kermit will discuss our financial results and outlook.
Fiscal year 2019 was a challenging time for Synaptics, you to increase macro and geopolitical uncertainty.
As well as management transitions that drove short term weaknesses in our business.
Despite these challenges we kicked off our new fiscal year laser focused on transforming into a stronger more profitable company for the long term.
We talked about on our last earnings call corporate transformation initiative, we kicked off focuses on driving innovation unlocking the untapped potential within our extensive product portfolio of technologies and expertise and aligning the business towards better profitability long term.
We have identified the investment areas for higher profitability and growth.
These include edge computing resources for consumer Aiotv in the smart home.
Fingerprint sensors and TDD for automotive.
All our display and touch for mobile devices.
Audio also sees for wired and true wireless headset.
And high speed wired connectivity for PC peripherals and beyond.
We are now executing on the transformation to deliver a stronger company with more diversified growth higher margins and stronger profitability.
While these focus areas, we are developing differentiated solution that encompass more software more former and more intelligent.
We are doing this in collaboration with our customers by aligning our roadmaps and continuing to be an essential part of the long term product development.
Based on these actions we are beginning to deliver better margins highlighted by a second consecutive quarter with gross margin about 39%.
In addition, we have a more diversified revenue mix with IP now accounting for 30% of our revenue and mobile accounting for just 50% in Q1 fiscal 20 down from over 60% for most of fiscal 19.
Our people are the key to our company's success and our ability to compete long term.
And this ATM issue restructured and reduced headcount aligning our workforce our strategic direction.
Further we kicked off a retention program to retain key engineering and management personnel to ensure continuity through this transformation.
These necessary and strategic actions are helping to establish a strong foundation for the future and our planned growth.
Now, let me share with you some recent business highlights.
Synaptics remains focused on innovating in the Io D. business, we have a strong pipeline on rent and confident to grow double digit in fiscal year 2000.
Leaving our innovation is the edge computing SLC portfolio that targets can human eye are being the smart home.
We are building a strong franchise around smart edge AI solutions that leverage our voice and video centric software and firmware capabilities.
Enabling our customers to quickly integrated IP and accelerate time to market.
Additionally investments in this area will combine our latest CBU NPU and GPU for enhanced computer vision capabilities.
If we're going to expand the Afghanistan.
We're seeing tremendous interest from Oems developing a new generation of media streamers and global service providers seeking to monetize on smart home products.
As we highlighted last quarter.
We started shipping smart, it's AI audio smart associates, and we are now expecting a major customer to begin selling their products in retail starting next quarter.
We are also now engaging with other hardware makers and kicked off several new designs based on these associates, who embed voice capabilities into their consumer devices like sound bars, Tvs mesh and divide by doctors.
And media streamers.
We expect to see these customer products at retail over the next few quarters.
Jumping to audio headset associates, we are building on our success with two of the world's top three smartphone Oems with a new design win for the highly anticipated flagship form that is expected to ship in every box at retail starting this quarter.
Additional investments in this area leverage our advanced software and firmware capabilities, such as hybrid active noise cancellation unique pulling back processing and cutting edge Weiss pickup technology.
These technology innovations and reach the audio experience expecting to drive greater adoption of our solutions and continued strong growth for us and next generation wired and wireless sensor.
The mobile business, we are focusing on higher gross margins.
Premium segment of the market.
We continue to win all that touch and display designs across major smartphone Oems due to our superior performance and features.
LCD based smartphones will remain a vital part of the smartphone makers portfolio over the next few years.
Two well established Oems and display manufacturer relationships.
We see ongoing development Ltd based handsets are encouraged by the opportunity to support the transition to all that.
As the industry prepares for the transition to Fiveg.
We're also partnering with display manufacturers and smartphone Oems to deliver high performance OLED and LCD screens that leverage the higher bandwidth networks better display and resolution to give consumers a meaningful improvement in performance in faster Fiveg network.
Moving to our automotive business, we had energized about the long term opportunity and we are investing in fingerprint sensors and gddrfive solution.
With regard to fingerprint business approval for startup production from our lead OEM customer and expect to see our first automotive fingerprint solution in 2020 model year cars.
Our TV AD solutions have been well received by Oems tier ones and display manufacturers worldwide.
We exited fiscal year 19, with DDD I design wins at six major Oems across Europe .
North America, Japan and China.
Many of these Oems are planning to transition all their future display systems do it all in cell platform using TTR.
Additionally, we are in active discussions with several additional Oems tier ones that is centered around migration to TBR for conventional touch screen.
We expect to have another successful year of design wins with automotive TDR product and that's my 20, and we are committed to this market long term.
Brent is expected to continue a TBD I offer significant cost and optical performance advantages to car manufacturers.
As a part of our effort to enable this industry transition synaptics is expanding our product portfolio in that pipeline.
Within our PC business Synaptics remains a major market share leader for both Touchpads as well as secure fingerprint authentication.
Growth in fingerprint Rpcs highlighted with new designs at all the major PC makers, including HP Dell and the noble.
We are a trusted leader in secure biometric and pleased to partner with these industry leaders.
As you can see in these highlights we are making progress in our transformation.
You've identified the right investment areas and executing to our strategy.
Our margins are improving.
Our business and customers are becoming more diversified.
We are well underway in our transformation journey became a stronger and more profitable company.
With that government will now discuss our results and outlook.
Thanks, Phil and Hello, everyone.
Synaptics revenue for fiscal 2019, and $1.47 billion was down 10% from last fiscal year.
For our fourth quarter revenue of $295 million was down 12% sequentially.
And 24% year over year.
Slightly below our guidance range and reflects the impact of our customer while always being placed on the entity list and accounting for more than 20 million impact in the quarter.
While we can ship our solutions to walk away without limitation.
Their ability to produce phones for certain markets has been adversely impacted by the restrictions on access to certain us based technologies as well as their ability to source other components.
Revenue in the June quarter from mobile Aiotv and PC products was approximately 54, 26 and 20% respectively.
We had two customers above 10% of revenue at 18 and 16%.
Well the June quarter.
Our GAAP gross margin was 30.6%.
Which includes $15.4 million of intangible asset amortization 700000 of share based compensation costs.
And the accrual of a $9 million charge for a loss on a supplier commitment agreement, which was an arrangement intended to secure a minimum supply commitment from a vendor through the end of calendar 2020.
As demand is no longer projected to achieve the minimum commitments required we have accrued an estimated loss under the supply agreement.
GAAP operating expenses in the June quarter for $123.7 million.
Which includes share based compensation.
Of $9.6 million.
Acquisition related costs of $3.2 million.
Consisting of intangibles amortization and transitory post acquisition compensation program costs.
Restructuring expenses of $7.3 million and retention program costs of $2.5 million.
As part of our corporate transformation, we initiated a restructuring in June which we anticipate will result in annualized operating expense savings exiting fiscal 2020.
Of approximately $40 million.
From reduced headcount outside support and project costs.
Also as part of our overall plan.
And to ensure operational continuity and support as we transition the company through senior level management and product focus changes.
We entered into retention arrangements with certain key engineering and management employees.
The cost of the retention arrangement is expected to be approximately $23 million and we will be accrued over the 18 month period ending November 2020.
Our GAAP tax rate was a negative 1% for fiscal 2018.
In the June quarter, we had a GAAP net loss of $46.2 million.
Or a loss of $1.35 per diluted share.
And for fiscal 2018.
GAAP net loss was $22.9 million or a loss of 66 cents per diluted share.
On a non-GAAP basis.
Our June quarter, non-GAAP gross margin of 39.1%.
Was above the high end of our guidance range.
And primarily reflects a better product mix.
June quarter non-GAAP operating expenses were below the low end of our guidance range at 101.1 million.
And up $1.9 million from the preceding quarter.
Fiscal 2019, our non-GAAP tax rate was 12%.
non-GAAP net income for the June quarter was $13.2 million or 38 cents per diluted share.
63% decline year over year, compared with $35.7 million or $1 per diluted share.
Fourth quarter of fiscal 2018.
non-GAAP net income for fiscal 2019 was $141.2 million.
Or $4 per diluted share.
Essentially flat compared to $141.4 million last fiscal year.
Turning to our balance sheet.
We ended the quarter with approximately 328 million of cash an increase of 4 million from last quarter.
The increase in cash for the quarter was primarily driven by cash flow from operations of $43 million.
Which was partially offset by.
$41 million of cash used in our share repurchase program for the purchase of 1.44 million shares.
Year over year cash increased by $27 million, which was primarily driven by cash flow from operations of $154 million, partially offset by $119 million used in our share repurchase program for the purchase of 3.29 million shares over 9% of our beginning shares outstanding.
Reflecting our ongoing commitment to generating shareholder value.
As mentioned in the earnings release, we repurchased an additional 556000 shares in July .
Increased the repurchase authorization by $100 million and extended the expiration date to July 2021.
Steven Wells at the end of June were $230 million.
And Dsos were 70 days, reflecting a back end loaded quarter.
Inventories were $159 million and inventory turns were five.
Capital expenditures for the year were 24 million and depreciation was $36 million.
Now I will make a few comments regarding our quarterly outlook.
Based on our backlog of approximately 277 million entering the September quarter.
Subsequent bookings customer forecasts product sell in and sell through timing patterns.
As well as expected product mix, we anticipate revenue for the September quarter to be in the range of $300 million to $330 million.
We expect the revenue mix from mobile Aiotv and PC products to be.
50, 30, and 20% respectively.
This guidance reflects a double digit sequential increase in our ICEE business, a small sequential increase in our PC business.
And our mobile business remaining flat due to ongoing uncertainty with wawa.
Excluding this effect, our mobile business would be showing strong sequential growth.
I will now provide GAAP outlook data for our September quarter, and will follow with non-GAAP outlook data.
We anticipate the stock based compensation charge in the first quarter to be in the range of $15 million to $16 million.
In addition September quarter GAAP expenses will include noncash charges of approximately $18 million related to intangibles app amortization.
Of which approximately $15 million will be reflected in cost of sales.
We also expect to recruit restructuring costs of $6 million to $7 million.
And retention costs of $4 million in the first quarter.
Finally, we expect our GAAP tax rate for fiscal 2020 to be in the range of 10% to 15% for the fiscal year.
I will now provide non-GAAP outlook data for our September quarter.
Taking into account our overall revenue mix, we expect non-GAAP gross margin in the September quarter to be between 39 and 41%.
Anticipated to be our third consecutive quarter with gross margin above 39%.
We expect non-GAAP operating expenses in the September quarter to be in the range of $96 million to $99 million.
We anticipate our non-GAAP long term tax rate for fiscal 2020 to be in the range of 11% to 13%.
non-GAAP net income per diluted share for the September quarter is anticipated to be in the range of 60 to 90 cents per share.
Now I'd like to discuss our outlook for fiscal 2020.
As a result of our shifting of investments driven by our new strategic direction and business model, we anticipate non-GAAP gross margins to improve to 39% to 41% for fiscal 2020.
With the midpoint, representing a key short term milestone in our corporate transformation.
We anticipate net revenue from it will increase by a low teens percentage.
PC will be essentially flat.
And mobile will be down significantly due to increasing macro economic uncertainties related to the current us China trade tension.
And our high end LCD mobile customers long term product shift to OLED.
For fiscal 2020 revenue will decline approximately 10% to 20% year over year.
We look forward to updating you as the year progresses with that I will now turn the call over to cereal to wrap up our prepared remarks, so Leo.
Thanks government in summary.
We are excited by the opportunities that lie ahead for us as we start our new fiscal year.
Our investments in differentiated higher margin products have already begin to pay dividends and we expect that our focus on priorities and investments are aligned to our corporate strategy will further improve our performance longer term.
With that I'll now turn the call over to the operator to start the Q and a session.
Thank you into the audience, yes. Thank you if you do have a question at this time.
Please press star one on your Touchtone phone.
Just a reminder, if you're joining us highest speakerphone today make sure. Your mute function is turned off till now the signal to reach our Clinton that.
Once again it is star one first question.
We'll go first to project Gill at Needham.
Yes, thanks for taking my questions.
A question on the on the fiscal year 20 outlook.
You had mentioned that.
Mobile is going to be down significantly due to China issues and then a shift.
Your top customer from LCD to OLED TV.
One to get a sense in terms of.
If you could elaborate further on on that on the macro China front.
How are you being affected by by that I mean are you seeing just overall lower Chinese handset units. If we take if we separate while away, but what about the other kind of the overall handset market in China.
And I guess the ship to oil you de with your top customer.
What is your position at already competitively going forward.
Good question.
As as for Callaway.
We obviously do you anticipate that that will be down.
And with respect to our other China customers.
Depending on the.
The products, we also anticipate that.
We'd be down somewhat too so overall, we're anticipating that.
Our TDD.
And DDIY site C products will be down obviously that deicing tied more to.
That one particular.
Key customer.
In terms of OLED.
Yes, Hey, Rajiv this is Silvio how are you.
Let me answer your OLED question that are just generically so the non Korean OLED market. This year is about 60 to 80 million units doubling from last year.
And the industry analysts are expecting noncore in all the led to increased even faster next year.
And as I've said in the past as we've said in the past we are well positioned to grow as the Chinese vendors like be OE and Jim come online.
And we are working very closely with them as we go forward and we continue to lead the market for high end OLED display drivers and we don't expect back to change.
And Thats, what our biggest.
Customer you, usually do not comment on that.
Okay I understand I'm, just if I just do the math on the overall revenue outlook of down 10%, 20% is going to it's going to imply that the mobile business is going to be down well over 30%.
So can you give us a sense of what percentage of sales and walk away.
[noise] [laughter], it's probably about 10, 10%.
And you know it's it's good to see that the margins are kind of stabilizing and kind of recovering.
You know can you talk a little bit about what actually let me just shift to the Opex. So I think you had mentioned that.
Exiting fiscal year 20 that there will be a reduction of 40 40 million. Good could you elaborate on that though what's kind of the 40 million off fiscal year 19, and what would be the overall opex profile.
On a go forward basis exiting fiscal year 2000.
Sure sure.
The forecast.
Obviously, we we had a focused effort to reduce costs.
Largely driven by a corporate transformation initiatives. So those costs were primarily headcount costs outside support and project costs and and.
A lot of this is transitioning through out the fiscal year.
But by the end of the fiscal year, we anticipate that the annualized savings would be approximately $40 million.
And we at the same time, we also saw some of those benefits in our Q4, but there's very little.
[laughter].
And we'll go next to Christopher Nolan at Susquehanna.
Hey, guys its David I really on behalf of Chris Rolland. Thanks for taking my question.
I guess to start out I guess, congratulations on your guidance next quarter, the 40% midpoint for gross margins, it's really come a long way over the past couple of years.
As we think about next year in your guidance kind of 39% to 41% for the year and given the transformation the business is ongoing and going under right now.
It seems it seems a bit like it could grow throughout the year or do you think that's a conservative target or is this just the revenue being down hurting gross margins.
So it really probably is the yes, the revenue being down thats going to.
Affect gross margins combined with the product mix within each of the product lines.
That's that's my view anyway.
The margins would be in that 39% to 41% range.
Got it and then a housekeeping on the gross margins as well.
The impact from the loss on supply commitments can you share any detail as to what product that was related to and then do you expect this to continue going forward or was this an accrual for the total loss. It was all taken in the June quarter.
This was an accrual for the total losses taken in the June quarter.
It had to do with mobile products.
Got it and then for my final one is I look at your backlog in the September guidance. There was a pretty high percentage is higher than normal of your total revenue that you're guiding to is there anything unusual you are seeing in order patterns or customer behavior that as lead into kind of a cautious approach there.
It's really.
There is a lot of uncertainty as it relates to two.
From our perspective, especially given the impact we saw last quarter in Q4.
You could argue that it's conservative, but I think it's also reasonable in light of the current macroeconomic conditions, China U.S. trade War.
Always seems to be effectively a bargaining chip within that trade war.
Great. Thank you.
And just a reminder to the audience. If you do have a question. Please press star one on your Touchtone phone.
And we'll move next to Charlie Anderson at Dougherty and company.
Yeah. Thanks for taking my questions. Good afternoon, there were a fair amount of comments in the script about automotive.
You guys mentioned, both to design fingerprint sensors, I wonder and some of the design wins that you're getting if you could speak to how much dollar content per car that could be you know if you have any thoughts on the adoption of fingerprint sensors overtime within automotive.
I imagine that's that's pretty much nailed today.
And then I've got a follow up thanks.
Hey, Charlie So you'll hear how are you.
So on the automotive side, specifically Charlie.
Depending on the number of screens the dollar content as you know double digit dollars. So it's quite substantial.
We have said earlier that the full scars with fingerprint.
2020 will be in the market 2020, so we've seen that and we see tremendous amount of interest and really adoption of this going on so we feel really good about it.
So being in production is going to be wonderful and then we are though are the ones that are the go to company to make that happen and and the TDD as I told you is getting more and more designed in and you know more and more cars a multiple screens and we are working very closely with most of the automotive guys to enable their solutions.
Great. Thank you for that slow and then there was also you guys went through the investment areas and I think one that was sort of new to me was the high speed wired connectivity for Pcs peripherals and VR. So wonder if you could expand on that at all thanks.
So Charlie that's a part of our IP portfolio and it's as I said at the last call. It's you know synaptics is that.
Tremendous technologies in house right and this is one of the Nuggets that as a part of my last few months of looking at the equity portfolio. This you've had this business.
Every dock that you buy right down needs a high speed connectivity device and we've had this interface technology in house and whats happening future is most of these are Pcs laptops.
Even though tablets only have the U.S.D. connector left so you have to buy one of these solutions either as a dongle or integrating their doctor. So we are extremely well positioned and the reason. This is a very exciting space is because it's got lots of analog content like high speed Surdez involved and therefore, it's hard for people to jump in so that's where we're at today.
Where we are taking into the future. We are requires high speed wired connectivity and we already spoke I think in the last call, but I'm seeing tremendous traction with our D. I C plus our high speed wire connectivity and I'm, telling you, we're getting double digit dollars as a bomb, but like three and four chips are designed into some of these VR headsets.
It's early days in the VR market, but as we position ourselves for longer term growth. This is the kind of space, we want to be.
Perfect. Okay. Thanks, so much.
Yup.
And we have no additional questions at this time, so that will conclude today's conference once again I would like to thank everyone for joining US you may now disconnect have a good evening.